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AbstractThe labor market by itself can create cyclical outcomes, even in the absence of exogenous shocks. We propose a theory in which the search behavior of the employed has profound aggregate implications for the unemployed. There is a strategic complementarity between active on-the-job search and vacancy posting by firms, which leads to multiple equilibria: in the presence of sorting, active on-the-job search improves the quality of the pool of searchers. This encourages vacancy posting, which in turn makes costly on-the-job search more attractive—a self-fulfilling equilibrium. The model provides a rationale for the Jobless Recovery, the outward shift of the Beveridge curve during the boom and for pro-cyclical frictional wage dispersion. Central to the model's mechanism is the fact that the employed crowd out the unemployed when on-the-job search picks up during recovery. We also illustrate this mechanism in a stylized calibration exercise.
CitationEeckhout, Jan, and Ilse Lindenlaub. 2019. "Unemployment Cycles." American Economic Journal: Macroeconomics, 11 (4): 175-234. DOI: 10.1257/mac.20180105
- E24 Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
- E32 Business Fluctuations; Cycles
- J63 Labor Turnover; Vacancies; Layoffs
- J64 Unemployment: Models, Duration, Incidence, and Job Search
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